Psychological Pricing Is Overrated

Psychological pricing is fun. In this field we get to study the effects of prospect theory (where losses loom larger than gains) to yield such odd behavior as the endowment effect (where we value what we have more than if we didn’t own it) and reference pricing (where we use the price we expect to pay in our decision making). We also have price endings, anchoring, dominated alternatives, good-better-best, and many more pricing tactics.

Psychological pricing can be defined as using pricing to take advantage of buyers’ lack of rationality. The books on this topic are quite fun to read. I recommend Dan Ariely’s book Predictably Irrational.

Experience shows that some of these tactics are pretty powerful while others are more interesting than impactful. Good-better-best and reference pricing are two that typically have a major impact. However …

Psychological pricing tactics pale in comparison to pricing for value.

Pricing for value (aka value based pricing) means understanding what your customers are willing to pay and charging as near to that as possible. If you are not yet committed to value based pricing, then focusing on psychology has minimal effect. By far the biggest impact you can have to your profitability is to adopt value based pricing. After you’ve adopted this most powerful pricing strategy, then you can worry about the psychological effects.